Depreciation Must be Removed While Calculating Net Margin: ITAT Remands Matter [Read Order]

In a recent case, the Kolkata bench of the Income Tax Appellate Tribunal ( ITAT ) remanded the matter related to the issue of depreciation while calculating the net margin. It was observed that considering depreciation as a part of the total cost would not be appropriate for benchmarking since the depreciation in the year under consideration was 16.92% of its revenue.

Jamshedpur Continuous Annealing & Processing Company Pvt. Ltd, the assessee challenged the final assessment order passed by the National e-Assessment Centre under the directions of Dispute Resolution Panel-2 ( DRP ), issued under section 144C(5) of the Act pertains to Assessment years2017-18 & 2018-19.

JCAPCPL, the assessee was a wholly owned subsidiary of Tata Steel Limited ( TSL ). It was later converted into a Joint Venture (JV) between TSL and Nippon Steel and Sumitomo Metal Corporation ( NSSMC ) on 17th August 2012. The JV was incorporated for constructing, owning and operating a Continuous Annealing and Processing Line ( ‘CAPL’ ) in Jamshedpur for the production of continuously annealed, cold-rolled steel/coils and sheets for catering to the niche product requirements of the automotive sector which was not very established in India. The commercial operations of JCAPCPL commenced on 01/04/2015. The company has been set up as India’s first CAPL 600,000 tonnes per annum of high-quality cold rolled sheets exclusively for the automotive industry.

During the calculation of the Net profit margin in ALP, the TPO had considered the depreciation of the assessee. The assessee is a newly set up business entity and yields huge depreciation. The assessee requested for acceptance of cash PLI for calculation ALP which was rejected by the TPO. The DRP had accepted the assessee’s plea, but the TPO had not considered it. The adjustment is calculated by the TPO amount to Rs. 35,27.000/- for AY 2017-18 which was upheld by the ld. AO. The aggrieved assessee filed an appeal before us by challenging the assessment order. 

 The grievance of the assessee is to consider the depreciation during the calculation of fair net profit under TNMM by the TPO. The assessee is a newly set-up company yielding huge depreciation in respect of comparable M/s Stelco Limited and M/s Tata Steel BSL Limited which were incorporated in 1995 and 1983 respectively. In comparison of depreciation percentage of revenue was @1.09% for Stelco Limited and 11.19% for Tata Steel BSL Limited whereas the assessee has @16.92%. The assessee prayed to reject both the comparable and functionally different. We accordingly direct the TPO /AO to remove both the comparable during the calculation of fairness profit for ALP. 

Further, the assessee has requested for acceptance of two comparable M/s Vallabh Steel Limited, for which rectification application under Section 154 has been filed before the TPO and is pending disposal and M/s Uttam Galva Steels Ltd.

The Two member bench of Dr. Manish Borad, Accountant Member &Shri Anikesh Banerjee, Judicial Member directed the TPO /AO to accept both the comparable M/s Vallabh Steel Limited and M/s Uttam Galva Steels Ltd after considering the function and activity of the two companies and direct to dispose of the rectification petition filed under section 154. The TPO/AO is directed to allow the fresh search about comparables of the assessee. 

The assessee prayed to remove the depreciation during the calculation of the profit margin and requested cash PLI in TNMM. In cash PLI the average of comparable to 10.44% which is similar for the assessee. The assessee stated that considering depreciation as a part of the total cost would not be appropriate for benchmarking since the depreciation in the year under consideration was 16.92% of its revenue, vis-a-vis depreciation of 4.85% of seven comparable companies as taken by the TPO which in most cases as average depreciation as a percentage of revenue.

The Tribunal remitted the matter back to the file of TPO/AO for further calculation of TP adjustment by considering the direction of the Bench. Shri Saumen Saha appeared for the appellant and Shri Kiran Chatrapoty appeared for the respondent.

To Read the full text of the Order CLICK HERE

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